The use of the phrase “worst-case scenario” is becoming more prevalent in discussions about geopolitics, according to a senior Hong Kong investment banker. This increased use is indicative of a growing concern among companies and investors who feel they cannot afford to ignore the risks associated with the worst-case scenario, no matter how unlikely it may seem.
The banker’s primary concern revolves around China, the United States, Xi Jinping’s ambitions, the uncompromising consensus in Washington, and the fate of Taiwan. While there is a possibility that tensions may subside and leadership summits may ease the hostility, for now, the situation feels irreversible and the divergence permanent – a combination that is cause for alarm.
The coming months are likely to be filled with experiments and contingency planning, driven by a now obligatory pessimism. US and European investors are particularly fearful of potential consequences involving China as a significant disruption could result in severe losses. Hong Kong, as a major hub for foreign capital allocation into China, is especially sensitive to this fear.
Meanwhile, Hong Kong also serves as a practical location for multinational corporations and global funds to develop a plan. One fund manager suggests starting with the assumption of a complete upheaval of the current state of affairs and working backward from there.
The Russian invasion of Ukraine has brought these planning efforts into even sharper focus. Witnessing investments in Russia evaporate overnight and portfolios being devalued to zero has instilled a similar fear regarding China.
There are two areas where Hong Kong will likely provide early indications of how global funds and multinational corporations are reassessing China risks. Observing Hong Kong will offer insights into how they are recalibrating their options. One of the potential signs of a significant shift in thinking is the increasing number of US and European multinationals exploring the idea of creating separate entities for their China businesses and listing them independently, with Hong Kong being a likely destination for initial public offerings.
AstraZeneca, a UK-based pharmaceutical giant, appears to be among the first to go beyond theoretical considerations and actively pursue this strategy. However, other companies have also started exploring this option. The underlying rationale for ringfencing the China business is to provide two layers of protection. Firstly, the main company would no longer face scrutiny regarding its exposure to China. Secondly, if there were to be a crackdown on foreign firms, the China business, having a local listing, could potentially be considered a domestic player by Beijing and allowed to continue operating.
Currently, the benefit of exploring this option may be primarily psychological and a way to assure shareholders. However, if the strategy gains widespread traction, the number of companies actively pursuing this approach will serve as a useful gauge of corporate concern. The more plans that are put into action, the greater the sense of impending danger.
Another area of experimentation that Hong Kong can observe closely is how companies respond to the pressure to “de-risk” supply chains. Many companies have genuinely redirected their supply chains away from China and towards Southeast Asia and beyond. However, the complexity and scale of China’s manufacturing industry has tempered some of the initial ambitious talks of a mass exodus from the country. Bankers involved in financing these moves believe that companies will resume their efforts based on the perceived level of risk. The bankers in Singapore and, particularly, Hong Kong, will be able to provide insights into the actual extent of these responses.
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